The past successes and future pitfalls of decentralisation in Vietnam

East Asia Forum - 3 hours 27 min ago

Author: Thomas Jandl, American University

Vietnam’s market reforms are inseparable from the policy of economic decentralisation, which allowed for local experimentation and forced provincial leaders into competition. This improved the business climate throughout the country. In this sense, decentralisation is a root cause of Vietnam’s attractiveness to investors around the globe. Yet it would be a mistake to view decentralisation as one smooth process. Instead, it has gone through two main phases and is now entering a third.

In the first phase, the central government only delegated implementation of economic policies to the provinces. Hanoi licensed investment and placed factories where it chose — initially around Ho Chi Minh City. As this southern region became a magnet for foreign direct investment (FDI) and experienced explosive economic growth, its leaders became bolder and pushed — and even overstepped — the boundaries of the law, in a process known as ‘fence breaking’. In the second phase, provinces attracted investment by improving regulatory environments. Investors then pushed for more, and taxes and jobs that came with FDI reinforced the positive feedback loop between investors and local regulators.

Successful provinces then transferred large fiscal surpluses to the central government. In 2004, only six of Vietnam’s then 64 provinces contributed to the central treasury. Moreover, demand for labour caused significant migration into those FDI-rich provinces. Hundreds of thousands of workers and their families began to depend on the industrial jobs in the ‘fence-breaking’ provinces.

Clearly, the central government could not crack down without killing the geese that laid the golden eggs.

This situation can be described as a harmony of interests, whereby all interest groups are better off cooperating than using coercion to gain a greater share of available rent. With the success of early reformers in shaping the business climate to the liking of a growing number of foreign investors, the central government turned from de-concentration to outright devolution of power. Many of the fences broken in the early reforms were mended not by a centre that re-imposed itself, but by one that re-wrote the laws, including granting the provinces the authority for economic management.

Now, Vietnam is entering a third phase of decentralisation. The new slogan is ‘too much competition, not enough coordination’. Every province lobbies for an airport, seaport or a new highway. But the problem is Vietnam’s particular fiscal allocation system. The central government negotiates the share of revenue a province is entitled to retain instead of sending it to Hanoi. The retention rate largely depends on what projects the province can convince the central government it needs to carry out. If the centre pays the bill, a province has no incentive to be thrifty or to coordinate with a neighbour over the optimal use of ports and industrial parks.

What is at issue here is thus not excessive competition among provinces with too much authority, but the violation of an iron principle of fiscal federalism: allocations must be formula-based, not open to negotiations and lobbying. Vietnam has largely decentralised economic authority, but it still coordinates resource allocation from the top. It is this gap between policy responsibility and fiscal self-determination that is causing problems with inefficient use of public funds.

But this third stage has a positive side as well. The most heavily invested provinces already argue that the high cost of living makes labour-intensive, low-value-added industries unviable. These provinces are partnering with surrounding — if less developed — provinces in what could be described as a domestic flying geese model, the policy of sending less productive industries to a poorer and cheaper location, while focusing one’s own efforts on higher-end processes and products.

The challenge for Vietnam’s central government is not to fall back to the old ways, when central officials declared that the party was right and any problems must have been the fault of misguided implementation at lower levels. The centre will have to give up some of the power that comes with distributing projects across the country to reward officials. Local officials will spend resources more wisely if they have to depend on a set amount of formula-based fiscal allocations whose use they then have to prioritise.

The East Asian model suggests that central guidance works best in the early stages of industrialisation. To make the move into a knowledge economy that vies for domestic value-added industries and avoids the middle income trap, the central government would be well advised to resist the temptation of reverting to coordination from Hanoi, and instead let the process of inter-provincial competition — which has worked so well in the early stages — run its course.

Thomas Jandl is a Scholar in Residence at the School of International Service at American University, Washington. His research focus is on Southeast Asian political economy.

Categories: Forum

Why Pakistan’s army stands to gain from political turmoil

East Asia Forum - Wed, 09/17/2014 - 17:00

Author: Vivek Kumar Srivastava, CSJM University

The political turmoil in Pakistan is approaching a decisive point. The ongoing protests led by Imran Khan and Tahir-ul-Qadri against Nawaz Sharif’s government have the potential to develop into a clash between democracy and the military. Already the crisis has given the Pakistani army greater political leverage.

Historically, the army has played a crucial role in Pakistani politics: it has held political power four times since independence; and when not in power the army has continued to have a major say in the political decision making process, particularly in the domain of foreign policy. The political leadership in Pakistan has learnt this hard fact but Sharif seems to have wilfully forgotten. Sharif would do well to remember that in 1992 Benazir Bhutto undertook a similar type of ‘long march politics’ (army-assisted regime change) and Sharif lost power the very next year, and in 1999 the army was once again responsible for his departure from the post of prime minister.

While accusations of electoral fraud were the immediate trigger for the current crisis, the political situation in Pakistan started to decline following Sharif’s visit to India to participate in the oath taking ceremony of Narendra Modi. The army is critical of Sharif’s friendly attitude towards Modi. Army and political executive interaction on Pakistan–India relations are critical to political stability in Pakistan. The army has commonly justified its political intervention based on relations with India.

The last army coup in 1999 was partially motivated by Sharif’s friendly India policy. Relations between Sharif and the army had been strained since Pervez Musharraf was appointed Chief of the Army Staff in 1998. Musharraf was critical of Sharif’s handling of major problems including the economy. After the 1999 Kargil conflict between India and Pakistan, the relationship between Pakistan’s political executive and military declined substantially. The eventual crisis was triggered when on 12 October 1999 Pervez Musharraf was removed from position of Chief of the Army Staff. Musharraf returned from Sri Lanka immediately where he was on official tour. Sharif’s instructions to refuse landing permission to Musharraf’s flight at Karachi airport from Colombo triggered the coup. The same evening the army toppled the Sharif government.

In the current crisis, both Imran Khan and Tahir-ul-Qadri appear to have tacit support from the army. The ongoing protests by supporters of Imran Khan and Tahir-ul-Qadri have brought Pakistan to a point where democratic forces are likely to be subdued if the military becomes actively involved.

The fluid political situation in Pakistan can provide Pakistan’s military the opportunity to take a more active role in the political process. Already, Army Chief General Raheel Sharif has met Prime Minister Sharif and both protest leaders in order to mediate the conflict. There is a group of five army commanders who feel that the army should intervene in the crisis, but the army chief seems to have decided to wait for the moment.

Prime Minister Sharif is sandwiched between protesters and army, knowing well that he has to deal with the army in order to survive. Sharif failed to effectively respond to the initial corruption charges, which triggered the crisis, and has consequently lost his moral authority. His defense minister Khawaja Asif has indirectly accepted the expanding role of the army by describing it as ‘monolithic institution’. It is possible that the army will ask Sharif’s government to focus on internal affairs, allowing serious foreign policy issues as relations with India and Afghanistan to be determined by the army.

The two major geopolitical changes in South Asia have further prompted the army to consider increasing their political role: Hamid Karzai and NATO forces are in the final phase of departure from Afghanistan; and in India Modi has come to power. The Modi government called off foreign secretary level talks with Pakistan last month, indicating it is likely to pursue a hard-line policy towards Pakistan. These developments in Afghanistan and India have pushed the Pakistani army to search for a decisive role for itself in the political life of the country.

So where does Pakistan go from here?

The next few weeks are crucial. Sharif is attempting to bolster his power with the help of the parliament. Sharif has discussed the issue with PPP leader and former president Asif Ali Zardari. Support from parliament has slowed the possibility of an army intervention, but despite parliamentary support Sharif remains unpopular on the ground.

The turmoil in Pakistan is a sad commentary on the state of democracy in the country. All players are responsible for this state of affairs. Imran Khan and Tahir-ul-Qadri have crossed the line by staying so long in the Red Zone area around the parliament, thus destabilising the political system. Sharif too has failed to stem the rot at the level of governance, and corruption charges have weakened the institution of the prime minister. The army is likely to emerge in the near future as the victor. Unless democratic stakeholders charter a new path, the loser will ultimately be Pakistan’s democracy.

Dr Vivek Kumar Srivastava is Assistant Professor of Political Science at Chhatrapati Shahu Ji Maharaj Kanpur University (formerly known as Kanpur University) and Vice-Chairman of the Center for Study of Society and Politics, Kanpur, India.

Categories: Forum

The fragile happiness of Japan’s ‘insular’ youth

East Asia Forum - Wed, 09/17/2014 - 05:00

Author: Noritoshi Furuichi, University of Tokyo

The youth of Japan appear to face a bleak future — a catastrophic budget deficit, ageing population and collapsing social security system. Despite this, according to data released last year, Japan’s youth are astonishingly positive in their outlook. In the government-run Public Opinion Survey Concerning People’s Lifestyles, levels of youth life satisfaction reached 78.4 per cent — the highest they had been since 1967 and higher than during Japan’s booming ‘bubble economy’ period.

What’s more, an NHK survey on youth attitudes reveals that more than 90 per cent of high school students are ‘happy’ and the majority of junior high school students are ‘very happy’. This information might seem hard to process given that the situation of Japan’s youth appears to be worsening.

From 2000, the mass media has been widely declaiming about the ‘dissatisfaction’ and ‘unhappiness’ of Japan’s ‘unfortunate youth’. Landing a stable job has become increasingly difficult and it is no longer rare to hear of people handing in over 100 resumes in their search for work. The phrase ‘black companies’ (sweatshops) has come into the mainstream to describe companies — and there are many — that break the Labor Standards Law. These companies often exploit desperate youths who are forced to work long hours with zero job security.

Last September, a Ministry of Health, Labor and Welfare investigation found that 4189 businesses, out of the 5111 investigated, had broken labour laws. A ministry official stated that ‘even though it was not just targeting [businesses abusing] young people, many young employees [were] found toiling under duress’. Consequently, from 2015, the labour ministry will be asking companies to provide worker turnover data to graduates in order to shed light on prospective labour conditions — and prevent abusive work practices.

Japan’s social problems are snowballing.

It is hard to think of Japan as being a very ‘happy’ or ‘content’ nation when looking at its budget deficit (the largest among developed countries); the decades-long clean-up process for the Fukushima nuclear disaster now underway; increasingly xenophobic rhetoric; and an ageing population threatening to topple the social welfare system. In addition, Japan provides low levels of social security to its working generation.

So why, in spite of this, are young people’s levels of life satisfaction and happiness so high?

In 2011, I published the book The Happy Youth of a Desperate Country and tried to tackle this question.

Japan is a wealthy and peaceful nation, with low levels of crime, high levels of education and well-established lifestyle infrastructure. There are many things Japan has to thank the older generation for. In that sense, Japan is blessed with unprecedented wealth.

Japan has become a more comfortable place for young people to live in. Continued deflation since the 1990s has encouraged higher-quality products at competitive prices — without having to spend too much, it is now possible to have a reasonably enjoyable everyday life. ‘Fast fashion’ has helped, with labels such as Uniqlo, H&M and ZARA providing affordable fashion ‘fast’. And now just by owning a smartphone one can spend hours killing time.

‘Family welfare’ is also an important factor in youth happiness. In Japan, as in Italy, the percentage of unmarried people still living with their parents is extremely high. Both young men and women often live with their parents until they are married. In 2012, 48.9 per cent of unmarried people between the ages of 20 and 35 were living with their parents. Even if a young person isn’t earning a wage, with support from their parents they don’t think of themselves as poor.

‘Enjoy today, tomorrow is coming’ encapsulates the mentality that increasingly absorbs Japan’s youth. This ‘consummatory’ mindset is where, rather than striving towards long-term goals, the focus is on having fun in the ‘here and now’. The modern youth of Japan cannot relate to the feelings of their parents or those who experienced the period of rapidly rising living standards and economic growth during the 1980s. The mantra ‘I am poor now but the future will be filled with riches’ is no longer relevant. Japan has become an incredibly wealthy country — the third-largest economy in the world — so its youth are treasuring the here and now, with little incentive to look towards a brighter future.

So high levels of life satisfaction may not automatically have a positive meaning.

In a recession people are less likely to blame themselves if their wage does not increase — they can blame the poor economic conditions. In boom times it is impossible to blame society. As a result one is left with the stark reality that ‘in spite of the boom, I am being left behind’ — and, with disappointment, life satisfaction falls.

The government’s lifestyles survey, which aims at those above 20 years of age, shows that the number of people ‘worried about the future’ has been increasing. During the bubble economy, youth who replied that they had ‘worries’ sat at 40 per cent, while in 2009 this increased to 67.3 per cent. So when thinking about the future itself Japanese youth are worried, but it appears they are happy about the present at the same time as resigned about the future.

The results of the NHK youth attitudes survey on high school students also showed a doubling over the past 30 years in the number of students stating they are ‘very happy’.

The consummatory mentality among Japan’s youth may also help explain such a high increase in youth happiness. For example, out of 16 different ‘interests’ in the NHK survey, the majority — 55 per cent — chose ‘hanging out with friends’. And according to the cabinet’s Eighth Youth World Consciousness Survey, 38.8 per cent in 1970 chose this answer but since 1998 it has sat at around 74 per cent. Love for one’s hometown and the number of youth refusing to leave their home region is also increasing. Even internationally these numbers are high.

More recently Japanese youth have been described as uchimuki (‘inward looking’ or ‘insular’), but it would be wrong to say that they do not value things around and close to them, like their friends. Rather, when measuring happiness and life satisfaction, the basis has shifted from society and politics, ‘public and wider things’, to ‘friends’ and ‘hometown’ — things that are in one’s immediate world. However, the uchimuki phenomenon is not necessarily due to lack of interest in leaving Japan or one’s immediate world but may also reflect high levels of present contentment — a consequence of the wider well-off socio-economic situation of Japan.

But young people will soon be unable to rely on the welfare provided by their families. Within a few decades the many parents who are still supporting their children will require nursing care. Under the burden of fees for aged care, parents’ accumulated savings will be strained and in many cases disappear entirely.

Today’s young people too will age. The elderly in Japan currently have many siblings and many are married, so care is often carried out by families and relatives. But the youth of Japan currently have few siblings, and many never marry. The number of ‘lonely old people’ will increase.

But it is unclear how sustainable Japan’s social security system is. The current system was established during the post-war period, and is clearly structured to rely heavily on young people. However, the working population needed to support the system is declining — and government and business have put off addressing the low birth rate issue for quite some time.

A crucial impediment to addressing these issues is that youth are underrepresented in positions of power. Japan’s decision-makers — who are generally older — tend to be concerned more with issues affecting older voters: the voting rate of those aged 65–69 is almost double that of those in their 20s.

A population that doesn’t have a replacement rate of 2.1 births per woman cannot sustain its population. Japan’s rate is 1.4. The Japanese government has finally revealed plans to implement policies to address the low birth rate and provide greater childcare, but its success is far from certain, and by the time the children are raised and can work 20 years will have passed.

Japan will not lose all its wealth straight away. The problems it faces will really start to hit home in the next few decades. But the future of Japan’s youth is not only their problem — it is the problem of every Japanese citizen.

Noritoshi Furuichi is a Japanese sociologist and PhD candidate at the University of Tokyo. He has published the best-selling book Zetsubō no Kuni no Kōfuku na Wakamono-tachi (The Happy Youth of a Desperate Country). This article, based on an extract from the book, was translated by Sigourney Irvine.

This article is digested from a longer piece in the latest edition of the East Asia Forum Quarterly, ‘The G20 summit at five’.

Categories: Forum

Seeking accountability and failing to find it

East Asia Forum - Tue, 09/16/2014 - 17:00

Author: Rosita Armytage, ANU

It started off fun. The Azadi (freedom) March led by Pakistan Tehreek-e-Insaf (PTI) chairman and former cricketer Imran Khan, and the Inquilab March (Revolution March) led by Tahir Ul Qadri of the Pakistan Awami Tehreek (PAT) party have created a festival atmosphere in the nation’s capital of Islamabad. Both Khan and Qadri are demanding that elected prime minister Nawaz Sharif resign and have stated that they and their supporters will not leave the protest site until he does.

Protest is an important part of democracy. But demanding the resignation of an elected leader, rather than a return to the ballot or a recount of the votes, is not democratic.

Both leaders have prompted their supporters to break the boundary fence of the National Assembly, to storm the prime minister’s house (which they have not been able to do) and to storm the public broadcast channel PTV (which they did). Both leaders have led their supporters to abrogate the constitution. They have failed to provide a viable opposition to the far-from innocent current government, and have failed to demonstrate the fortitude required to push legislative reforms through parliament. Both leaders have also led their supporters into violent clashes with the police. The police responded predictably to incursions on state buildings by firing rubber bullets and tear gas into the crowd. During the last week, the police began arresting large groups of protesters for acting in a ‘manner prejudicial to public safety or the maintenance of public order’ on what most agree are feeble grounds.

Like all great carnivals, the festival atmosphere of the tent city in the heart of the parliamentary zone sours during inclement weather as those who can escape the muddy grounds for home, and then quickly revives as the sun rises, and rejuvenated weekend-protesters again flood the protest site. Despite the damage to the democratic process being sought by Khan and Qadri, the protests are a powerful indicator of the frustration, anger and resentment felt by so many Pakistanis towards a government that has failed to serve them — and failed to deliver on its promises. Despite Prime Minister Nawaz Sharif’s promise in his inaugural speech to close ‘the doors for favouritism and corruption’, the leadership of Nawaz Sharif and his brother Shabaz, Chief Minister of Punjab, continues to be plagued by accusations of corruption and cronyism.

Khan’s claim that the last election was rigged has grounds for support. The lack of electoral transparency has been noted by civil society organisations such as the Free and Fair Elections Network (FAFEN). But the charge has not been proved and requires a full review of records held by the Election Commission of Pakistan. This is a task for a judicial commission, not an opportunity for an opposition leader unable to support his claims with electoral data to become judge and jury.

Qadri’s claim that the government is rife with corruption, although rarely disputed, is similarly inadequate as grounds to demand the prime minister’s resignation. Qadri’s efforts to dismantle the democratic political system he once freely participated in provide no clear vision and no long-term strategic plan for eliminating corruption and creating a fairer, more just Pakistan.

In contrast to the circus currently underway in Islamabad, it turns out that building and sustaining a democracy is a long and often tedious process requiring not ‘revolution’ but commitment to the democratic system and the bureaucratic processes of which it is comprised. First among these processes is adhering to the constitutional mandate that elected leaders see out their term — or are challenged through an early election.

Khan and Qadri have made no serious demand for a fresh election (though they have not explicitly come out against it), because they know they do not have the supporter base to win.

Real policymaking — beyond the flashy made-to-be-noticed infrastructure projects that Prime Minister Nawaz Sharif and his brother Shabaz Sharif are known for — is usually not all that exciting. Developing, and even more importantly, steadfastly implementing, monitoring and regulating the critical economic growth policies required by the country need incremental, ongoing commitments. The government must be committed to resourcing and prioritising these issues beyond the election cycle. Working to overcome the vested interests of the powerful lobbies against tax reform; combating terrorism not only in Punjab, the political constituency of the Sharifs, but across Pakistan’s provinces is vital for the growth of businesses and for ongoing investment; and tackling the country’s massive education crisis are not easy challenges. They are not quickly solved and they are not usually characterised by momentous breakthroughs.

There is nobody dancing in the street when a senior bureaucrat writes a sensible policy proposal and submits it to the minister. There is nobody dancing in the street when a government official refuses to appoint the friend of a friend to an important position within the finance or education ministry, and instead hires someone competent and committed to effectively implement that policy. There is nobody dancing in the street when an individual business opens and employs 30 people because they believe the laws protecting their investment will be upheld and that their daily business will not be affected by ongoing security challenges.

An estimated 10,000 protesters demanding the resignation of an elected leader is not democracy. It is careless national-hostage taking by an opportunist who has shown himself time and again to have no strategic vision for the country and a committed religious idealist whose charter of reform includes the dissolution of parliament and the assembly.

Rosita Armytage is a researcher and a PhD candidate in anthropology at the Australian National University

Categories: Forum

Childcare not the only cost for working women in Japan

East Asia Forum - Tue, 09/16/2014 - 05:00

Author: Mark Fabian, ANU

Japan has recently moved to increase its female labour force participation rate, with the government allocating significant resources to tackling Japan’s longstanding shortage of child care places. Alongside this expansion in child care services, immigration laws are to be relaxed to allow for the recruitment of more foreign nannies. While these reforms are critical and long overdue, more must be done to increase female agency if Japan is to optimally utilise its female population.

In 2013, Japan’s female labour force participation rate for 15–64 year olds was 64 per cent; low by OECD standards. Greater availability of affordable child care should improve this figure, as there is a clear correlation between expanding child care services and women taking up paid work in Japan. Given that the shortage of places has been documented since at least the Koizumi administration, an easing of constraints here should see quick results.

But it is not that easy.

For starters, the government is coming up against barriers to expansion, notably the lack of qualified staff and the relatively high cost of low-skilled labour in Japan, which makes child care expensive by OECD standards. Looser immigration laws might help but are a politically difficult reform. Another option is to utilise Japan’s large population of retirees. Those interested in child care work with experience raising their own children could be offered fast-tracked qualifications.

If successful, a policy to this effect would solve multiple problems. It would ease the labour shortage and expand child care provision. It would allow older workers to be retained by the workforce. And it would provide Japan’s elderly, who are often lonely, more opportunities to socialise.

Another issue is that childcare only frees up parents for around six hours a day, which is not enough to engage in regular full time employment under current conventions in Japan. Work hours in Japan are notoriously long, and flexible work arrangements are rare and viewed disparagingly by management.

This means that childcare will largely allow women only to enter irregular work. But part time wages in Japan are low compared to wages for regular workers, so women employed in such positions will not be paid appropriately for their level of education. This is a waste of human capital. Moreover, the large degree of duality in the Japanese labour market between regular and irregular workers is already a drag on productivity, and thus increasing this divide would be undesirable.

For women to be mothers and participate in work at a level commensurate with their skills, cultural change is required at the organisational level. Some obvious changes include greater provision of flexible work times, efforts to schedule meetings at times that suit working parents, the phasing out of the seniority-based wage system (nenko jyoretsu) and other practices that reward time in the office rather than output, and an acknowledgment that women are just as capable as men of performing in managerial roles.

Yet Japanese firms are notoriously reluctant to change their attitudes and practices. A glaring example is the negligible impact of Japan’s equal opportunity legislation. Abe’s push for a 30 per cent female management quota should help. It will discourage firms from placing women on the irregular/clerical track by default, and encourage them to retain and invest further in female workers who marry — rather than pressuring those who are unwilling to commit to long hours at the office to leave. Women could then engage fully in the workforce, confident they can continue their careers after marriage and children.

A change in organisational culture to accommodate parenting would also allow men to spend more time in the home, an important condition for high quality labour force participation by mothers. Women cannot be expected to take care of the home and work a full-time work week. But here policy comes up against the intractability of culture at the societal level. Japan has had big economic incentives for reform for some time but failed to capitalise, in large part because of cultural inertia.

One pertinent example is Japan’s parental leave system, which rivals Scandinavian systems in its incetivisation of getting men involved in parenting, yet is utilised by few men — just 1.9 per cent in 2012. Much of this relates to the disapproval of workplaces, but more diffuse societal factors play a part. While traditional gender roles are slowly losing popularity, they remain entrenched. In 1979, more than 70 per cent of respondents to a survey by the Gender Equality Bureau of Japan agreed that men are expected to work while women are expected to keep the home. The percentage fell by 2009, but was still high at 45.8. The continuity of these gender norms is implicated in the difficulties associated with career advancement for Japanese women and their atypical rates of graduation from university — Japan is one of the only countries in the OECD where fewer women graduate from university than men.

Essentially, the opportunity cost of getting educated and working hard is relatively high for Japanese women.

As women are offered more respect from employers, their parenting desires are better accommodated by spouses and firms, and their potential contribution to the economy more widely acknowledged, this opportunity cost should fall and more women will engage more actively in the workforce. Unfortunately, this will require cultural change, which is difficult to accelerate with policy.

Mark Fabian is a postgraduate student in economics at the Australian National University.

Categories: Forum

Defeating India’s disastrous food price inflation with trade

East Asia Forum - Mon, 09/15/2014 - 17:00

Author: Rajiv Kumar, CPR

Indian economic data in July on industrial growth and inflation was disappointing. Industrial sector growth slowed to 3.4 per cent in June 2014 with the manufacturing sector, the largest component, growing at an anaemic 1.8 per cent. But the more worrying set of statistics was the rise in retail inflation to 7.96 per cent in July 2014, which also reversed the declining trend observed since December 2013.

Not only is this raising consumer anger against the government but it also lowers the prospects of an interest rate cut by the Reserve Bank of India that could reignite growth and investment in an environment in which credit uptake remains very poor. And finally, rising inflation always provides the political opposition with a stick to beat the government with, thereby putting it on the defensive.

Retail food inflation continues to persist at near double digits — 9.36 per cent in July. In the case of food inflation, it is the same old story with the prices of proteins (eggs, fish, meat), milk, fruits and vegetables leading the inflationary charge. The principal culprits have once again been fruits and vegetables: inflation in the prices of these commodities in July 2014 came in at 22.5 per cent and 16.8 per cent respectively. This can only worsen as monsoons continue to disrupt supplies and demand becomes stronger with the onset of the Hindu festival season.

Clearly, measures taken by the new government have failed to make any significant dent in inflation. These measures have largely taken the form of ‘administrative’ steps of raids against people hoarding food and the issuing of non-bailable warrants against them. It is surprising that the government continues to expect this ‘district magistrate’ type of approach to yield results in economic management. It should surely realise by now that it does not. Apparently even the removal of fruits and vegetables from the lists of the Agricultural Produce Market Committee in Delhi has not had a dampening effect on prices. Farmers have clearly been unable to find other channels for selling their products.

One way forward could be for the government to incentivise the National Dairy Development Board to scale up their successful Safal venture and enter wholesale markets more aggressively.

The medium-term solution for controlling food inflation can only be raising production of commodities that are in short supply and improving yields and productivity. Unfortunately, it is hard to attract investment into the production of these perishable goods because actual and perceived risks are much higher than in crops enjoying minimum support prices. This necessitates some radical thinking.

The absence of large-scale organised retailers, like supermarkets, has resulted in meagre investment in logistics and backend infrastructure between farm gates and markets. Consequently, wastage remains high. It is indeed surprising that the Ministry of Food and Agriculture has not uttered even a word on the persistently high and worsening food inflation or about any measures to raise production or productivity. Cracking down on hoarding can only bring very temporary respite, if any, and is not a solution. It is critical that the government considers some other measures to boost supply, which would help to rein in food inflation and reverse inflationary expectations.

Two such measures can be considered right away. First, the government should liberalise agriculture imports and lower import duties on fruits and vegetables to a flat 10 per cent. At present fruits attract a wide range of import tariffs ranging from 25 per cent for grapefruits to 50 per cent for apples, 70 per cent for coconut flesh and 105 per cent for dried grapes. The majority of fruit varieties, as also nearly all the vegetables, however, attract an import tariff of 30 per cent. The rationale, if any, for differentiated import duties on fruits is not clear.

Vested interests will raise the bogey of such import duty reduction hurting our poor farmers. This is dishonest and disingenuous. The reduction in import prices will principally affect trade and intermediary margins, because farm gate prices are in any case strictly cost plus due to farmers’ inability to hold on to their output. India’s balance of payments will also not be much affected. In 2013-14, India imported less than US$1 billion of fruits and vegetables.

The second immediate step should be to minimise non-tariff barriers that hold up imports of food into India. Food imports are subject to long procedural delays, arbitrary and frequent changes in regulations and unpredictable payments. Testing laboratories, located far from the borders, take weeks to give their reports and often only once they receive a bribe. It is high time that India removed these non-tariff barriers and opened its markets for fruit and vegetable imports from neighbouring countries.

This will have the twin benefits of winning friends in our neighbourhood and also augmenting food supplies to rein in inflation. Most importantly, it will demonstrate to the traders, hoarders and speculators the government’s determination to fight food inflation, which ultimately hurts the poor most of all. It is time that The government must think a bit less administratively and a bit more imaginatively to defeat inflation.

Rajiv Kumar is a Senior Fellow at the Centre for Policy Research. He is also the former Director of ICRIER. .

A version of this article first appeared here in Mail Today.

Categories: Forum

A chance to mend China–Japan relations

East Asia Forum - Mon, 09/15/2014 - 05:00

Authors: Yves Tiberghien, University of British Columbia, and Yong Wang, Peking University

Over the last two years, China–Japan relations have been trapped in a downward spiral. The inescapable reality of an ongoing great power transition makes this situation particularly tense: the size of China’s economy relative to Japan’s jumped from a mere 25 per cent in 2000 to 99 per cent in 2009 and then to 188 per cent in 2013. Yet an alternative policy course is slowly developing.

Should Chinese and Japanese leaders grasp this chance, they could turn the relationship into an economic asset for the demanding reform programs pursued by Japanese Prime Minister Shinzo Abe and Chinese President Xi Jinping.

Following former Japanese prime minister Yasuo Fukuda’s secret meeting with Xi Jinping in Beijing in late July, the foreign ministers of the two countries — Wang Yi and Fumio Kishida — recently met in Myanmar on the sidelines of the ASEAN Regional Forum to discuss Sino–Japanese relations. These meetings have raised expectations of a possible bilateral summit meeting in Beijing on the back of the APEC Leaders’ Summit in November.

Japan and China should grasp this new opportunity.

The tough economic reforms launched by the new Xi regime since 2013 to move China beyond a possible ‘middle-income trap’ stand a greater chance of success with Japanese technology, know-how and support in regional governance.

Japan’s Abenomics reforms have hit both fiscal and structural obstacles. The Trans-Pacific Partnership (TPP) could eventually help incentivise further structural reforms, but progress in the trilateral FTA with China and South Korea as well as further integration with China could support growth more directly. Together, Japan, China and South Korea could play an innovative role in East Asian economic governance and, beyond that, in the G20.

What would it take to move in this direction?

In the decade following the Asian Financial Crisis, a common commitment to economic liberalism and the political will to cooperate boosted the whole Asian economy. As a result, all economies in the region, including the US, benefited from the ASEAN-led process of regional cooperation.

In contrast to these pragmatic times, Japan and China have now openly launched rival integration projects. They are members of competing trade agreements (Japan in the TPP and China-centred FTA networks with regions such as ASEAN, New Zealand, and other around the world). To mark its displeasure with the Japan-controlled Asian Development Bank, China is now planning to establish the Asian Infrastructure Investment Bank later this year. China also played a leading role in the recent BRICS decision to create the Shanghai-based New Development Bank, in part to rival the G7-dominated World Bank and IMF.

Mutual accommodation would allow for a more secure and prosperous way for both countries to jointly contribute to furthering development and boosting trade in the region.

Although the China–Japan–South Korea FTA talks are currently stalled, all three economies are highly interdependent. The trilateral FTA is still officially seen as the top priority FTA by China and it is strongly supported by business groups in Japan.

The recent bad shape of Sino–Japanese relations has as much to do with the growing sense of economic competition as it does with the disputes over territory and history.

As the world’s second and third largest economies, China and Japan find themselves increasingly locked in a tense competition for energy and raw materials, secure shipping lanes and overseas markets — particularly in sectors such as high speed trains, power generation, IT and electronics products. Xi’s active diplomacy with Russia, Africa and Latin America, and Abe’s globetrotting reflect the increasing sense of insecurity over these matters.

Misunderstandings about the intentions of the other side, as well as strong posturing for domestic audiences, has also fuelled tensions. But, if the leaders of China, Japan, and South Korea recognise that their respective top priority reform goals will rise or die together, a new domestic discourse could begin to take hold.

The leaders of Japan and China should grasp the current opportunity to compromise and create an amicable environment at the summit meeting in November. While public opinion in both countries about the other side is abysmal, the publics in both countries support a summit (65 per cent in Japan, 53 per cent in China) and more management of the relationship.

As an important step, Abe should avoid visiting the Yasukuni Shrine. Ideally Japan should develop a long-term arrangement where leaders and citizens alike praying for the souls of Japanese soldiers who died for their nation can be separated from tacit support for the 14 Class-A war criminals, enshrined at Yasukuni, and the Yushukan Museum.

A practical arrangement on another key issue, the disputed Diaoyu/Senkaku islands, is also needed. Japan and China could return to the 1972 understanding to peacefully shelve the issue for future generations to resolve. This should be supported urgently by developing communication protocols among coast guards and practical ways of dealing with possible fishing incidents, along the lines of a presumed 2005 secret agreement . Such simple moves would enable both sides to deescalate the risks of naval and aerial confrontation.

These ideas may seem unrealistic in the current domestic environments of both China and Japan, but there is reason to be cautiously optimistic. For the first time in more than 10 years, both China and Japan have strong and secure political leaders at the same time. Should they choose to work together and focus on their common interests, they could usher in a new win-win relationship from which the region, and the world, would immensely benefit. It is high time to step back from the brink and prepare for a path-breaking summit in November.

Yves Tiberghien is Director of the Institute of Asian Research and Associate Professor of Political Science at the University of British Columbia

Yong Wang is Professor and Director of the Center for International Political Economy in the School of International Studies at Peking University

Categories: Forum

China and India’s growing strategic weight

East Asia Forum - Sun, 09/14/2014 - 19:00

Author: Peter Drysdale, Editor, East Asia Forum

The visit of Chinese President Xi Jinping to India this week, so early in the term of India’s new prime minister, Narendra Modi, underlines the growing strategic weight of the relationship between the two countries. Modi’s prime ministership, with its ambition to re-invigorate India’s stalled economic reform and growth, more than any other single factor, promises to accelerate its potential growth radically. Modi has runs on the board with China in bringing Chinese investors to his home state, Gujarat — as of last year about 20 Chinese companies had set up shop — and through his personal engagement.

Their sheer size and growth potential — particularly India’s — mean that China and India will be at the core of the Asian powerhouse over the coming decades. Over the past 20 years, the two countries have already more than tripled their share of the global economy. Adjusted for purchasing power parity (PPP), the Indian economy is now roughly the size of Japan’s. In PPP terms, China’s economy is likely to top that of the United States in the next year or two. One Goldman Sachs estimate suggests that India’s economy will surpass the US economy by 2043. For long the world’s second largest in population, the dynamics of India’s population growth will push it ahead of China’s in less than two decades.

Despite this, India will likely remain a lower-income country well into the century, lagging behind China and its BRICS counterparts unless it can throw off the shackles of outdated development strategies and a culture of bureaucratic inertia — satisfied with benchmarking itself to standards that don’t measure up internationally.

India has the world’s largest concentration of poor people, with more than 840 million living on less than US$2 a day and 400 million on less than US$1.25 a day. By 2050, with the world’s largest population, India will face multiple challenges around urbanisation, infrastructure, jobs, drinking water, and food for its citizens. Ironically, as its size and rising middle-class power lead many to highlight its role in powering the Asian century, unless its poor can be embraced in the process of growth, China-style, India’s escape from the middle-income trap will remain a dream.

Located in the right place and at the right time, how can India thrive, alongside its giant Asian neighbour? What opportunities does China offer India and what opportunities will the rise of India offer China? India is bound to a low per capita growth trajectory unless it can lift its annual growth rate by at least 2 to 3 percentage points. Is China a threat to India’s regaining its growth momentum, or does it offer a way out of continuing economic fragility?

These are the questions that will be at the back of the minds of Prime Minister Modi and his advisers as they welcome President Xi this week.

Although it would be rash to declare that there is any clear national consensus on the answers to these big questions about India’s future and its relationship with China, Modi’s instinct and his temperament will bring a measure of sureness to answering them that may well be the first steps in defining it.

Modi’s vision is of an India that can look out and compete in the world, finding its way with China and all the world’s major economies. It is of an India that will welcome more and more Chinese investment (together with that from Japan, South Korea and other international investors), taking up opportunities in manufacturing and services where China, for example, can longer compete or never could. And that is the India with which China’s engagement is growing deeper day-by-day and with which its leadership is looking to do business. It is not the defensive, protectionist, bureaucratic India that still too often carries the day, as it recently did when it inexplicably scrapped the WTO deal on trade facilitation.

As Sen explains in his piece on the visit this week, for Xi and Modi to redefine the bilateral relationship in this way, ‘the existing policymaking structures and thinking have to be discarded’. This is a big ask but it is one that, one senses, the Indian people were seeking when they swept Modi to power, as they sought new leadership and a transformation in national thinking.

What will drive these changes and India’s deeper integration into Asia with China, of course, is the inexorable force of India’s and China’s demographic dynamics and growing market size. It will do this by leveraging the two countries’ divergent demographics and their trade and geographic and cultural proximity. Failure to understand the force and potential of the growing weight in the India–China partnership continues to wrong-foot analysis in Washington and Canberra (and other places). The pace and scale of bilateral trade and investment growth between China and India is bound to match that of India’s other Asian partnerships.

But what of the baggage of history in the relationship, it might well be asked?

Sourabh Gupta in this week’s lead examines how Modi and Xi might pirouette around resolution of the border issues that have irritated relations for years. With India having signed on in principle to a package deal after four decades of hesitation, Gupta says, ‘the onus is broadly on China to guide the negotiations towards a successful, status quo-based closure. President Xi will likely want to fully size-up the strategic orientation of the new government in Delhi before committing China to a permanent resolution of the dispute. By admitting that the business transacted (by the British) at Simla a century ago was not as sacrosanct as many Indians have been led to believe, Modi can signal that India stands willing — and politically able — to fashion a creative boundary package that is shorn of the baggage of its colonial past’.

There are other important initiatives underway which might later be recognised as the beginning of a new regional cooperation dynamic. President Xi will confirm his invitation to Prime Minister Modi to attend the APEC Summit in Beijing in November (although India is not yet a member of APEC) and for India to participate in the Asian Infrastructure Investment Bank which China is currently in the process of launching.

Peter Drysdale is Editor of the East Asia Forum.

Categories: Forum

China–India border dispute: when Xi comes calling, will Modi be ready?   

East Asia Forum - Sun, 09/14/2014 - 05:00

Author: Sourabh Gupta, Samuels International

When President Xi Jinping arrives in the Indian capital next week, he will become the first leader of a major power to pay a state visit in the Narendra Modi era. It is rare for a Chinese head of state to visit India this early in his tenure. It took Jiang Zemin seven years and Hu Jintao four years to pay their solitary visits to New Delhi.

President Xi’s early arrival attests to the forward progress in Sino–Indian relations since late 2009. There has been no territorial nibbling by People’s Liberation Army (PLA) personnel in the disputed belt along their Himalayan frontier in the past five years — though numerous cases of ‘transgression’ have been reported. Territory is no longer utilised as an expedient pressure point by Beijing to signal disaffection; for the most part it is seen rather as a land bridge to restore the spirit of good neighbourliness in ties with India.

The extent to which China and India have of late couched their diplomatic engagements in the vocabulary and practices of an earlier age of Asian connectivity and cosmopolitanism is revealing too. In 2010, an Indian-style Buddhist temple was dedicated by the Indian president to the city of Luoyang, a key terminus on the tea, horse and Buddhist items trading circuit that had bound China, Tibet, India and the nomadic Inner Asian empires together.

In October 2013, President Xi unveiled his signature ‘new silk road’ corridors initiative at a rare Party work forum on periphery diplomacy. India was integral to these belts of contact and commerce and the formalisation of sub-regional economic corridors is expected to be a key takeaway from Xi’s New Delhi visit.

This June, China and India along with Myanmar commemorated the 60th anniversary of the Five Principles of Peaceful Coexistence (Panchsheel) which derive from their overlapping traditions of political morality and ethical universalism. A geo-political order that is keyed to regional tradition and historical circumstance might yet furnish a doctrine of legitimacy that complements the balance of power in the Asian Century.

China and India must first conclusively resolve their long-festering Himalayan boundary dispute if they are to translate their respective trans-Himalayan principles of harmony and unity into a workable model of conflict resolution for others in Asia and the world.

Six years after the Five Principles was codified in treaty form, Myanmar resolved its boundary dispute with China, which had been ‘left over from history’. Eight years after the Five Principles’ codification, India by contrast spurned a similar package offer of settlement and fought a losing border war with China.

India must de-anchor its strategic vision as well as its inflexible negotiating stance on the eastern sector boundary from the painful legacy of the 1962 war.

New Delhi insists to this day that the Anglo-Tibetan understanding on the alignment of the boundary — the McMahon Line — that emerged from a convention in Simla in 1914 is immutable (though the line can be fine-tuned on the ground). The boundary was known at the time to the Chinese side and not expressly objected to, and in any case the Tibetan authorities had the right to sign boundary treaties ‘during the 300 years prior to 1950 … whatever [sovereignty-related] status [it] had enjoyed’. So China is duty-bound to honour that commitment.

But both arguments are flawed. The international boundary question was never put forward to a tripartite discussion at the convention’s plenary session; hence the Chinese envoy had no means to formally record an objection. Tibet, or any other local authority, was not empowered to conduct boundary negotiations and the notes appended to the 1914 convention affirmed that Tibet was a part of China. Both London and Beijing had repudiated the Simla understandings before the ink was dry.

Successive Indian prime ministers across party lines have incrementally retracted New Delhi’s maximalist Sino–Indian boundary claims — although primarily in the western sector. In 2003, the previous BJP government under Atal Bihari Vajpayee junked two decades of Congress government-led negotiating strategy that had marked time in technical-legalistic preliminaries and vowed to resolve the dispute on the basis of forward-looking political and strategic imperatives. Within two years, principles-based parameters to guide a settlement were agreed upon. When Xi Jinping arrives in New Delhi, Narendra Modi should go one step further and acknowledge that the eastern sector boundary has never been formally demarcated and its alignment is hence in dispute.

Make no mistake — with India having signed on in principle to a package deal after four decades of hesitation, the onus is broadly on China to guide the negotiations towards a successful, status quo-based closure. President Xi will likely want to fully size-up the strategic orientation of the new government in Delhi before committing China to a permanent resolution of the dispute. By admitting that the business transacted at Simla a century ago was not as sacrosanct as many Indians have been led to believe, Modi can signal that India stands willing — and politically able — to fashion a creative boundary package that is shorn of the baggage of its colonial past.

New Delhi may pleasantly find that in making this gutsy call, the watershed principle and the due interests of the settled population in the boundary areas are settled to its advantage during Xi and Modi’s terms of office.

Sourabh Gupta is a Senior Research Associate at Samuels International Associates, Inc.

Categories: Forum

India and China must think outside the ‘bureaucratic box’

East Asia Forum - Sat, 09/13/2014 - 05:00

Author: Tansen Sen, City University of New York

Chinese president Xi Jinping’s forthcoming visit to India will achieve nothing unless the new leaders of India and China can overcome existing inertia and seriously start revamping their bilateral relations. It is true that the two sides have managed to avoid a repeat of the 1962 armed conflict, and that diplomats have to be credited with limiting the border differences to a few ‘incursions’ and a tense standoff at Daulat Beg Oldi near the disputed Aksai Chin region in May 2013. But, as these episodes accumulate and are sensationalised by the media and dramatised in the blogosphere, they perpetuate mutual distrust and harden negative public perceptions.

Clearly the policy pursued during the last two and a half decades of emphasising trade while taking incremental steps towards managing, without resolving, the border issue has not worked.

Xi Jinping and Narendra Modi have to take prudent steps to move from just managing the relationship to making it truly open and trustworthy, something that was envisioned in the Panchsheel Treaty of 1954 but never attained, despite the celebratory events marking the 60th anniversary of the treaty this year.

The problem lies in the bottom-up policymaking that has defined the post-1962 relations between India and China. Mutually suspicious bureaucrats have hesitated to facilitate people-to-people, industry-to-industry or sub-region-to-sub-region exchanges and collaborations. This is clear by the limited educational interactions between the two countries due to the Indian Ministry of Home Affair’s reluctance to issue visas to Chinese students and instructors and the failure of the Bangladesh–China–India–Myanmar sub-regional collaborative initiative.

There are contradictions between the India–China joint declarations about promoting people-to-people exchanges and the implementation of these measures. Intra-ministerial disagreements, mystifying constraints, narrow visions and a reluctance to involve competent people often render these processes ineffective. These initiatives are usually categorised as ‘public diplomacy’ and epitomised by heavy handedness and restrictions imposed by bureaucrats who treat them as no more than symbolic gestures. In fact, free interactions at the grassroots levels — that could potentially advance mutual awareness and knowledge — have never been fully encouraged seemingly for ‘security’ reasons. Consequently, the rhetoric and false narratives of friendship get recycled while the general public remain in the dark and utterly confused about the actual policy goals.

For Xi and Modi to redefine the bilateral relationship, the existing policymaking structures and thinking have to be discarded. These leaders are the ones who should outline the relevant policies and order the bureaucrats to implement them. Their aim should be to dilute the dogmatic thinking of the respective diplomatic corps, military commanders and intelligence chiefs so that they become decisive and committed to the long-term prospects of India–China relations.

A first step could be for the two leaders to be frank about the historical ambiguity of the territorial claims and acknowledge publicly that there is no other option for resolving the border issue other than recognising the Line of Actual Control. In the short term, such a joint declaration might lead to condemnations by a few members of the public and — especially in India — political factions. But after numerous rounds of border talks without any substantial outcome, this might be the only way to come to terms with the legacies of colonialism and imperialism, and heal the scars of the 1962 war.

The persistent lack of mutual trust and the continued suspicion of each other’s wider geopolitical intentions are apparent in China’s failure to unequivocally support India’s aspiration to become a permanent member of the UN Security Council and India’s resolute efforts to keep China out of the South Asian Association for Regional Cooperation. Xi and Modi could unreservedly support these ambitions and wishes of the other side — not as quid pro quo steps but as gestures of genuine confidence-building.

Even at the early stages of their careers as national leaders, Xi and Modi already have firm standing in their respective countries. They may not be able to resolve the border issue immediately, but the two leaders have enough political capital to at least be magnanimous in backing each other in the wider global arena. In order to redefine the bilateral relationship, they have to go beyond the usual auguries of the bureaucrats about possible repercussions for national interests. Trust between India and China needs to be built on confidence and convictions, not on the computations of career bureaucrats.

President Xi Jinping will mostly likely try to entice India to join his so-called ‘Silk Road’ project. Xi must understand that he will be unable to draw India into a cookie-cutter plan given the existing scepticism in India about Chinese soft power schemes. Any utterings of support from the Indian side during Xi’s visit will be superficial and are unlikely to yield any substantial breakthroughs in bilateral relations. Likewise, Modi must refrain from his own pet proclamation of ancient Gujarat-China relations through the visit of the seventh-century Chinese monk Xuanzang, who merely traversed through the present-day Gujarat region. Instead of highlighting this historically irrelevant episode — Xuanzang passed through several other Indian states — Modi could elucidate his success in bringing Chinese investors to Gujarat — about 20 companies as of last year — and make a commitment to allow such investments in the ‘sensitive’ northeast regions of India.

The India–China relationship is already brimming with rhetorical pronouncements. What it lacks is concrete steps towards building better awareness and eradicating undue suspicions and scepticism. It is time for the two leaders to lay a new foundation not only for the improvement of bilateral relations, but also for reshaping intra-Asian connections and exchanges.

Tansen Sen is an Associate Professor of Asian history at Baruch College, City University of New York.

Categories: Forum

Refining the role of government in the Australia–Indonesia live cattle trade

East Asia Forum - Fri, 09/12/2014 - 17:00

Author: Ray Trewin, ANU

The governments of Australia and Indonesia have become heavily involved in the live cattle trade. The 2011 Australian ban on live cattle exports to Indonesia, after some animal cruelty was drawn attention to, may have been the blackest day for Australian agricultural politics. And the issues continue, as governments inappropriately use trade policy to address sensitive domestic non-trade issues (like Australian animal welfare and Indonesian self-sufficiency). But government involvement, rather than disadvantaging trade and livelihoods by raising uncertainty and lowering prices as is the case now, could help solve these issues.

Going back in time, the Export Control Act 1982 was established to protect responsible exporters and consumers following a meat substitution scandal in 1981 involving a rogue exporter. Aspects like exporters paying Australian Quarantine Inspection Services (AQIS) directly, with some of these costs passed on to consumers through higher prices, were appropriate in this case. Further arrangements enforced by the AQIS have emerged over recent years. But these arrangements have appeared rushed and lacking in evidence-based policy analysis or forethought on appropriateness. For example, AQIS pushed for the stunning of cattle in Indonesia when it was not required by the relevant international organisation, the World Organisation for Animal Health, or fully practiced in Australia.

Improvements in animal welfare standards in developing countries can be driven by developed countries through trade. But this is not happening in the Australian live cattle trade which is from a developed to a developing country. The existence of alternative suppliers — including other developing nations without strict demands on animal-welfare standards — means that Australia has very little leverage. It is not necessarily more government involvement in the trade that is needed but more evidence supporting an increased trust and reliance on more cost-effective industry approaches, driven by joint-interest and suitable policies.

The current government approach of trying to address non-trade issues with trade policies is indirect and inappropriate. Other issues of concern relate to the current Australian Position Statement on the Export of Livestock (APS) which is under review.

First, the Australian government has very little power once cattle are unloaded but is shifting animal-welfare responsibilities onto exporters, many with little such power.

Second, some arrangements de-privatise the trade (for example, deaths are measured on ship rather than on a consignment basis), diminishing property rights and traceability.

Third, World Organisation for Animal Health standards are based on general performance criteria rather than the costly APS prescriptive regulations focusing on detailed inputs and processes with few incentives to lower costs. Also, restricting processes could be disputed under WTO-rules.

Finally, there appears to be few clear roles or responsibilities for regulatory actions, and a lack of national consistency with other regulators like the states.

Another problem is that there are minimal benefits as the Australian government, at an economic and overall animal-welfare cost through losing market share, tries to exceed international standards in a misguided attempt to minimise animal-welfare impacts. The Australian trade is one of the most animal friendly in the world and having its market shares replaced by less animal friendly trade due to higher costs will only lower overall animal welfare. Moreover, this approach gives scant attention to Australian society’s trade-off between animal-welfare and production. A further problem with the heavy government involvement is the trade’s vulnerability to non-trade issues like the phone hacking of the Indonesian President’s family, unlike more private sector trades such as the more significant wheat trade.

The Australian cattle industry is rightfully upset about increasing government fees that are justified on delivering reputed animal-welfare benefits to Australian society. But only Australian producers, exporters and others in the supply-chain pay for these more general benefits, many directly and others, like Indonesian consumers, indirectly through market forces.

There are better ways than heavy government involvement. Increased private-sector involvement through-joint ventures could expand control and lower uncertainty, providing opportunities for an efficient beef supply-chain in a growing regional market. Elders, a large vertically-integrated livestock exporter, set acceptable standards (which the government tried to mimic with a costly prescriptive-approach) and was successful. This was because Elders’ interests to be a responsible investor and uphold high standards of animal-welfare aligned. There was also an underlying threat of stronger regulations and public disapproval of poor behaviour. Greater private-sector involvement, driven by self-interest that matches the interests of society rather than a vocal minority, could allow governments and responsible companies to avoid costly bureaucratic control through a ‘social licence’ being given to operate without such controls. Scarce government resources could then be focused on the longer-term objective of helping ‘non-licensed’ firms in Indonesia improve standards based on approaches of companies with a ‘social licence’.

Accepted labelling of sustainable meat production could also improve animal welfare and allow the market to deliver on society’s animal-welfare values. This is the case in egg production with its government classification and RSPCA endorsements of specific production labels. Australian consumers favouring free-range egg production bear the costs of this preference directly through premium prices which provide a signal of society’s preferences. A World Wildlife Fund and an industry push to endorse sustainable meat production, like in forestry, would need government partnerships to be acceptable in international trade where ‘G2G’ (government to government) is important.

Current government involvement appears too large, pushing Australia out of the trade with increasing prescriptive bureaucratic demands that have been ineffective and offer few incentives to lower associated costs — which are being unfairly imposed on exporters and indirectly on Indonesian consumers. Refining the government’s role, allowing greater and more cost-effective private-sector involvement through joint-ventures, government-facilitated ‘social-licence’ and labelling are all necessary measures to address the current costly situation.

Dr Ray Trewin is Visiting Fellow at the Crawford School of Public Policy, The Australian National University.

Categories: Forum

Why is Indian FDI shying away from South Asia?

East Asia Forum - Fri, 09/12/2014 - 05:00

Author: Saman Kelegama, Institute of Policy Studies of Sri Lanka

There have been promises of greater Indian investment in South Asia for a long time. A report produced by the Asian Development Bank (ADB) in 2007 argued that India would play a key role in investing in South Asia and this in turn will stimulate intra-regional trade in the region. The report made special reference to the rapidly growing Indian IT industry and identified it as a potential investor in South Asia. The ADB argued that business process outsourcing, knowledge process outsourcing, call centres and other IT related sub-contracting would shift to regional countries as a response to increased costs of doing business in India.

It predicted that a somewhat similar experience to Japanese foreign direct investment (FDI) inflows to ASEAN countries in the 1980s — the so-called ‘flying geese’ phenomenon, whereby industries are first established in more developed countries then move progressively to less developed ones — would be seen in South Asia with FDI from the Indian IT sector taking the lead. But this hardly happened over the last five years, with Indian IT investors preferring countries like the US, the UK and Singapore for investment rather than other South Asian countries.

The total FDI outflow from India to the rest of the world increased from US$20 million in the early 1990s to US$15 billion by 2011, albeit with some fluctuations. India is the largest investor among South Asian Association for Regional Cooperation (SAARC) countries in South Asia but the regional share of Indian outward FDI has declined continuously from 4.5 per cent in 2003–2004 to a mere 0.1 per cent in 2006–2007. Generally, FDI from large developing countries like China and Brazil is heavily concentrated in other developing countries. But during the past decade the destination of Indian FDI has shifted in favour of developed countries and transitional economies. This has partly contributed to the decline in the South Asian share.

A study of Indian outward investment by United Nations Conference on Trade and Development in 2004 identified four reasons why Indian FDI generally flows to developed countries. First, Indian firms are looking for international brand names, for instance, Ranbaxy Technologies acquiring the French firm RPG Aventis in 2003 and Tata Tea acquiring UK-based Tetley Tea in 2000.

Second, access to technology and knowledge has been a strategic consideration for Indian firms seeking to strengthen their competitiveness and to move up the production value chain; one example of this would be Wipro acquiring the American firm Nerve Wire Inc.

Third, the success of Indian service providers in outsourcing IT Services, BPO and call centres by firms in developed countries has exposed them to knowledge and methods of conducting international business, which in turn has induced outward FDI with demonstration and spillover benefits.

Fourth, securing natural resources has become an important driver for Indian outward FDI. For example, Hindalco acquired two copper mines in Australia, and ONGC has bought a 20 per cent stake in the Sakhalin-I oil and gas field in Russia. All these factors point to Indian firms wanting to develop a portfolio of locational assets as a source of international competitiveness and visibility.

But, leaving aside these factors, the general business climate in the South Asian region is also a factor that discourages Indian FDI. Most South Asian countries rank low in indicators of the ease of doing business although they still possess the comparative advantage of low labour costs. Regional countries also fear Indian domination and therefore are much friendlier to non-Indian sources of FDI. For example, in Bangladesh in the early 2000s, the Indian group Tata’s proposal to invest US$3.6 billion in a urea fertiliser plant and a steel mill and the Mittal Group’s proposal to invest US$2.5 billion in a steel mill, both fell apart due to domestic political developments.

In Sri Lanka, the Indian Amul Company came to the market in 1997 for liquid milk production and functioned till 2000, and then pulled out its investment due to trade union hostilities in the factory incited by the milk powder import lobby in Sri Lanka. In the Maldives, the GMR Group of India, which embarked on an airport modernisation project in 2010, had to exit the project due to unilateral termination by the Maldivian government in 2012. The point to be noted is that in general, there is a non-friendly attitude (not necessarily hostile) towards Indian FDI in the region.

With low intra-regional trade (5 per cent), the trade-investment nexus is weak in the SAARC region. Perhaps it is time to make investment liberalisation a priority item on the SAARC agenda if more Indian outward FDI is to be seen in the region. More broadly, there also needs to be a change in attitude both from India and its neighbours if more investment from India is to flow to the South Asian region.

Saman Kelegama is the Executive Director of the Institute of Policy Studies of Sri Lanka

Categories: Forum

China and Taiwan walking the line of rapprochement

East Asia Forum - Thu, 09/11/2014 - 17:00

Author: Justine Doody, Berlin

After more than six decades of conflict over the political status of Taiwan, Beijing and Taipei are taking significant steps toward rapprochement in their relations. Yet how much Chinese influence can Taiwan’s democracy tolerate?

On 25 June 2014, for the first time in over 60 years, China sent a ministerial-level figure on an official visit to Taiwan. Zhang Zhijun, head of China’s Taiwan Affairs Office, spent four days in Taiwan, reciprocating the historic visit of his Taiwanese counterpart, Wang Yu-Chi, to Nanjing in February. The February encounter was the first official meeting between representatives of China and Taiwan’s governments since the end of the Chinese Civil War in 1949.

Official contact between the two governments is the latest sign of the rapprochement that Taiwan’s President Ma Ying-jeou has been trying to foster since coming to power in 2008. But the threat of reabsorption by military force still hangs over Taiwan. Even as economic ties grow closer, Taiwan’s people are still divided on the degree of friendliness their government should offer to their larger neighbour.

Taiwan tops the latest edition of the Bertelsmann Stiftung’s Transformation Index (BTI), which measures developing and transitioning countries’ progress towards democracy and a socially responsible market economy. Taiwan has a strongly developed market economy which suffers from neither barriers to market entry for private enterprise nor structurally embedded social exclusion.

This stands in sharp contrast to its more powerful neighbour: China has the second largest economy in the world, but social exclusion, inequality and poverty are rife. Private business faces huge hurdles in dealing with a weak and arbitrarily applied legal framework.

Even so, Taiwan is increasingly dependent on trade with the mainland. In 2010, two years after Ma was first elected, China and Taiwan established an Economic Co-operation Framework Agreement (ECFA). Since then, trade between the two sides has been liberalised. According to the BTI report, trade with China accounts for around 40 per cent of Taiwan’s exports. Taiwan’s total trade with China amounted to US$165.6 billion in 2013, according to Taiwan’s Bureau of Foreign Trade. And visitors from China are now a key driver of Taiwan’s tourism industry: 2.8 million Chinese came to Taiwan in 2013 and 670 flights go between Taiwan and the mainland every week.

Taiwan’s business leaders support closer economic ties because they stand to profit from them. The ruling party, the Kuomintang (KMT), has always been on the Chinese side of the identity divide in Taiwan. And Beijing has come to believe that the best path to unification, a goal it has not abandoned, is now economic control rather than military incursion.

But the people of Taiwan are not all convinced. Ma’s approval ratings stood at 17.9 per cent in May 2014, which still represented a leap from his dismal 9 per cent rating in November 2013. In March, over 100,000 people marched in Taipei against the ratification of the Cross-Strait Services Trade Agreement (CSSTA), a new trade pact that would further extend Chinese penetration of Taiwan’s market by opening 80 of China’s service sectors to Taiwan and 64 of Taiwan’s service sectors to China. And between 18 March and 10 April 2014, a group of students and activists calling themselves the Sunflower Movement occupied Taiwan’s parliament in protest against the same agreement.

A controversial editorial in the Wall Street Journal in August 2014 said that unless Taiwan enacts the CSSTA, it risks losing out in trade with China to competitors such as South Korea. But other commentators argue that allowing China to invest in sensitive sectors such as telecommunications and print media would enable China to exercise greater influence and to work its will to undermine Taiwan’s political system.

The BTI gives Taiwan a score of 9 out of 10 for freedom of expression and 10 for civil rights, as compared to China’s score of two for both indicators. With China still aspiring to unification, any step towards increased influence could prove detrimental to Taiwan’s well-functioning democracy.

Ma and the KMT aim at rapprochement with China, but not unification. Their argument is that building a good economic relationship with China safeguards Taiwan’s status, since closer economic links would make it costly for China to take over Taiwan by force. As Taiwanese self-identification solidifies more and more, preserving the status quo is the most popular option: almost 55 per cent of the people of Taiwan view themselves as exclusively Taiwanese, rejecting any notion of a Chinese identity.

But Ma is approaching the end of his tenure: elections are set for 2016, and it is likely that his rivals, the Democratic Progressive Party (DPP), will succeed in winning back the presidency. The DPP has always been a strident voice for independence and its relationship with China has therefore been frosty. But Beijing is well aware of the failing fortunes of the president and it is willing to take extraordinary measures to avoid derailing the economic relationship that it has built with Ma.

In his June visit, Zhang Zhijun met with the DPP mayor of Kaohsiung, Chen Chu, in a move that many saw as the first step towards reconciliation with the hitherto anti-China DPP. The DPP has aspirations to be seen as the party of the people in contrast to the KMT, which they would cast as the party of the rich. But the people want stability and prosperity, and if economic links with China offer a path to that progress, the DPP will have to walk the line between resisting unification and encouraging closer ties. It remains to be seen whether and for how long Beijing will facilitate the balancing act.

Justine Doody writes for the Bertelsmann Stiftung’s BTI Blog and SGI News.

Categories: Forum

India and Japan boost cooperation, but no nuclear power deal

East Asia Forum - Thu, 09/11/2014 - 05:00

Authors: Pravakar Sahoo and Abhirup Bhunia, IEG

Modi’s visit to Japan from 31 August to 3 September was dubbed a success. But what has been achieved? And what do these achievements mean for both countries?

Modi’s visit assumed far greater significance than any previous visits by Indian prime ministers. This is because Modi has a powerful mandate and, of course, because of the reported bonhomie between Modi and Abe. When Modi was Gujarat’s chief minister, Japanese firms participating in the Vibrant Gujarat Summit invested between US$2–3 billion in various manufacturing and infrastructure projects in that state, in response to its investor friendly environment. Modi shares this business friendly attitude with Abe.

The existing ties between India and Japan are underpinned by commercial bonds. Trade between India and Japan totalled US$18.61 billion in the 2012-13 financial year and the two sides have set a target of US$25 billion by 2014. This is relatively low given the size of both the economies and compared to both countries’ trade with China. In 2013, trade between India and China totalled US$65 billion, while trade between Japan and China totalled US$310 billion. This is somewhat ironic as India and Japan are said to be forging a regional counterbalance to an increasingly assertive and powerful China at a time when their respective trade volumes with China are considerably higher than bilateral trade between them.

Japan is India’s fourth largest investor, with cumulative foreign direct investment (FDI) of about US$16 billion in the last decade and a half. The Indian automobile sector in particular owes a lot to Japanese investments in terms of development of advanced supply chains, growth in ancillary units and technology transfer. In 2011, India and Japan signed the Comprehensive Economic Partnership Agreement.

Japan has reportedly promised investment and financing inflows of around US$35 billion to shore up India’s infrastructural sector. Japanese official development assistance (ODA) through the Japan International Cooperation Agency (JICA) has been particularly important for India which has been one of the largest recipients since 2003. ODA is heavily directed towards long-term participation in infrastructure development in India. As of mid-2013, Japanese loan assistance to India amounted to US$15.91 billion, spanning 67 projects. The cumulative Japanese ODA loan commitment to India as of 31 May 2013 was US$37.61 billion. In line with the specific requirements of the Indian economy, a third of Japanese ODA is located in the energy sector. The transportation sector also received a sizeable share. During Modi’s visit, Japan and India signed agreements to secure Japanese funding for transport infrastructure and the development of industrial cities.

Important deals were also made in trade and FDI, including Japan’s commitment to technology transfers in defence. India will buy the Japanese built US-2 Amphibian aircraft and Japan will transfer advanced technology to India. This will pave the way for the two countries to work together in building a local aircraft industry in India. Modi’s ‘come, make in India’ campaign has been well received in Japan. Japan has removed restrictions on six Indian entities in the defence sector.

Japan has also responded to Modi’s move to remove India’s FDI cap on railway infrastructure. Japan offered financial, technical and operational help in introducing bullet trains in India. This is likely to be initiated in the Mumbai-Ahmedabad route. Besides presenting Japanese firms with a lucrative business opportunity, this would also help fill India’s infrastructure gap. The Chennai metro project is already being funded by JICA, as are the Delhi-Mumbai and the Chennai-Bangalore Industrial Corridors. Japan is more than happy to help India fortify its high speed railway infrastructure at a time when China is racing ahead with superfast bullet trains.

But, despite officials from both sides being ordered to prioritise the issue, a nuclear deal remains elusive.

Japan’s nuclear energy related sales are a key part of its infrastructure-related exports. Japanese firms produce vital reactor components and are keen to supply them to India. But, because India is a non-signatory to the Non-Proliferation Treaty, Japan is currently having a hard time finalising the agreement. Civil nuclear energy talks were hit badly following the Fukushima disaster in 2011 but Japan agreed to resume negotiations last year. On the positive side, the Japanese public is now more receptive to a nuclear energy deal with India. Modi stated there is now an improved ‘understanding’ between the two countries after some ‘frank’ discussions about civil nuclear energy. Both Abe and Modi are reportedly keen to fast track discussions to enable the deal as soon as possible.

One underreported achievement from Modi’s visit is the revival of the agreement between Japan and India to trade in rare earth minerals, which was beset with conflict over pricing. This is important as China currently has a monopoly on this sector. Rare earth metals are a key input for production in high-tech industries ranging from smartphones and notebook computers to aircraft.

Finally, Modi’s assurance that India will fast track Japanese investment in India and set up a special team in the prime minister’s office to facilitate Japanese FDI is a signal to the world about the special position India accords to Japan. The crucial infrastructural partnership between Japan and India has been further solidified with this visit.

Pravakar Sahoo is Associate Professor at the Institute of Economic Growth.

Abhirup Bhunia is a researcher at the Institute of Economic Growth.


Categories: Forum

BRICS, banking on development

East Asia Forum - Wed, 09/10/2014 - 17:00

Author: Keshav Kelkar, UBC

The creation of the BRICS New Development Bank (NDB) to finance infrastructure and sustainable development projects in emerging economies is a landmark achievement. Developing nations have lost faith in the current system with its strict conditions on development finance and its inability to insulate countries from financial shocks. International observers have however expressed mixed views about the creation of the bank and what it represents for the nascent multilateral BRICS bloc of Brazil, Russia, India, China and South Africa.

Some observers remarked that the NDB represents a timely response to the failure of the existing Bretton-Woods institutions to adequately represent the needs of emerging economies. Others, however, are sceptical of the NDB’s capacity to address these issues, noting that existing rifts between BRICS nations could undermine the initiative.

Despite these naysayers, the creation of the NDB is a positive step for the BRICS nations and developing countries in general. While it is not yet clear whether the NDB will pose a direct challenge to the global financial status quo, its creation presents a number of opportunities for the developing nations.

First, the creation of the NDB will strengthen the voice of developing economies in shaping the future direction of global development finance. The Bretton-Woods institutions, such as the World Bank and IMF, have long dominated the development agenda. These institutions have crafted development strategies and presented them as the only viable model for generating economic growth. The power of the World Bank lies not so much in its deep pockets as in the enormous research and communication capacities it deploys to set the global development agenda. The 2008 global financial crisis revealed that these institutions are ill-suited to address the political-economic realities of the twenty-first century. However, it is the unwillingness to reform these institutions that has incensed developing countries.

Developing countries feel that their place at the decision-making table is not proportionate to their growing economic influence. For example, although the BRICS comprise over one-fifth of the global economy, together they only wield about 11 per cent of the votes at the IMF. But reforms have been met with reluctance, and even resistance, by Western nations.

Western nations are concerned that giving a greater voice to developing nations would diminish their own influence or, in some cases, require developed countries to make financial commitments that cannot be upheld in a post-2008 setting. As Raj M. Desai and James Raymond Vreeland argue, ‘these developments show the political tightrope on which countries must walk when it comes to global development finance: while low- and middle-income countries have legitimate claims about their exclusion from the governance of the Bretton-Woods institutions, richer countries cannot cede too much influence over these institutions to developing nations and still justify large contributions — in particular, to the World Bank’s International Development Association every three years, and to the IMF as part of quota reforms — to their restless voters, especially during difficult economic times’. The NDB represents an attempt by developing countries to level the playing field in a system that has failed to keep pace with their economic growth.

Second, the NDB can fill the existing gap in infrastructure financing. The 2008 global financial crisis has diminished the lending capabilities of Western institutions. The World Bank’s lending has reduced to half of what it was before the global financial crisis. Private lending for infrastructure has also shrunk to one-third of its pre-crisis level. This comes at a time when many developing countries require financing for infrastructure projects in order to tackle the challenges of population growth, rapid urbanisation and environmental degradation. Infrastructure spending in developing countries will need to increase from its current level of approximately US$0.8-0.9 trillion per year to approximately US$1.8-2.3 trillion per year by 2020.

Investment in infrastructure is necessary to improve economic conditions in developing nations. Building roads or railways immediately boosts output and jobs, and helps to spur future growth — provided the money is spent wisely. Better transport helps farmers move their produce to cities and manufacturers to export their goods overseas. Countries with lower transport costs tend to be more open to foreign trade and so enjoy faster growth. Clean water and sanitation also increase labour productivity. While the NDB will have an initial subscribed capital of $50 billion, it has the potential over time to serve as an alternative source for financing important development projects. It may also act as a catalyst for private sector investment, thereby overcoming many of the deficiencies in the current system.

Lastly, while the NDB does not yet pose a direct challenge to its existing Bretton-Woods counterparts, its creation will generate competition among global financial institutions. The creation of the NDB comes at a time when developing countries no longer have faith in the current system and are seeking to promote and safeguard their economic interests. To that end, establishing regional monetary funds can be more effective than the current system when it comes to representation, coordination and crisis management.

The entry of the NDB into development finance comes at a critical juncture when the financing needs of developing nations are rapidly outgrowing the capacity and willingness of traditional funding agencies.

Keshav Kelkar is a research fellow at the Institute of Asian Research, University of British Columbia.

Categories: Forum

Curbing volatility: the case for monetary policy coordination

East Asia Forum - Wed, 09/10/2014 - 05:00

Authors: Rakesh Mohan and Muneesh Kapur, IMF

Since the onset of the North Atlantic financial crisis (NAFC) in 2008, central banks in the US and the other major advanced economies have pursued highly accommodative monetary policy, including through unconventional policy actions. Policy rates have been near zero in these economies for almost five years, and both short-term and long-term interest rates have touched historic lows. These low interest rates encouraged the search for yield and, consequently, large amounts of capital flowed out of these reserve-currency economies to the still relatively fast-growing emerging-market economies (EMEs), complicating their macroeconomic management.

Capital flows to the EMEs are well known for their volatility over the past three decades. This volatility was again in evidence during May–August 2013, when the US Federal Reserve first hinted at tapering its unconventional monetary policy, and again in January 2014 after the actual tapering began. However, stronger macroeconomic and financial policies and the buffers built by EMEs over the past decade have helped them avoid a full-blown financial crisis. The tapering episode has nonetheless hurt their near-term growth prospects significantly, while also illustrating the potential underlying vulnerabilities in the international monetary system.

Developments since 2008 have put a spotlight on the impact that monetary policy in the reserve-currency countries has on the rest of the global economy.

Given these spillovers, there is a renewed debate on the merits of monetary policy coordination among the major central banks. The current stance of monetary policymakers in advanced economies is that either there are no significant cross-border spillovers from their accommodative monetary policies, or that they are indeterminate, or that they are in fact positive overall for EMEs. There is also a view that monetary authorities’ mandates are such that they can only take account of the domestic impacts of their policies: taking a cross-border global view would be beyond their mandates.

In contrast, the banking sector regulatory architecture has been characterised by international cooperation for a number of decades now — the Basel I, II and III standards are the well-known outcomes of this approach. The financial crisis provided an impetus to international economic and financial coordination, especially regulatory coordination and ‘unprecedented and concerted’ fiscal expansion. The G20 leaders’ initiatives led to a significant strengthening of financial-sector regulations and regulatory architecture, including the establishment of the Financial Stability Board in April 2009.

The G20 initiatives also led to a noteworthy increase in the International Monetary Fund’s resources and lending capacity in 2009 and again in 2012, a critical step in restoring global financial stability. And, overall, there have been welcome G20-led initiatives to improve international economic and financial coordination since the onset of the NAFC, playing a critical role in providing some stability to the global economy while avoiding a repeat of the 1930s Great Depression.

But as far as international monetary policy coordination is concerned, the traditional view of domestically oriented monetary policy is still seen as the optimal arrangement, although there are some calls for a reassessment.

It is not the case that there has been no coordination at all. In the aftermath of the NAFC, the activation of swap lines by the US Federal Reserve with central banks in major advanced economies and a few select emerging markets is an example of some coordination, but this effort appears to have been motivated by the likely adverse impact of liquidity in these advanced economies suddenly drying up on these economies themselves. Coordination does not appear to have been motivated by the likely impact of advanced economies’ monetary policies on the EMEs.

If the prevailing view held by advanced-economy monetary policymakers does not change, EME authorities will have to manage these spillovers on their own. This would involve a combination of various policies to promote financial stability in their economies. Judicious capital account management to reduce the domestic impact of volatile capital flows would be a significant element in such policies. There is now near unanimity on the desirability of maintaining flexible exchange rates, but this is tempered by the desire to contain volatility in the face of significant disturbances in global financial markets. Thus capital-account management would need to be accompanied by appropriate foreign exchange intervention, while maintaining exchange-rate flexibility, and building up adequate precautionary foreign exchange reserves. Such macro-management would only be effective in the presence of prudent monetary and fiscal policies, and the continued development of domestic financial markets along with active financial regulation.

But the possible effect of such uncoordinated policy action on the part of both advanced economies and EMEs could be potential fragmentation of global financial markets. EMEs might be forced to pursue more inward-looking policies, which will then have a negative impact on global demand and growth.

What is the alternative to such outcomes? Advanced economies’ central banks need to explicitly acknowledge and appreciate the spillovers resulting from their unconventional monetary policies. Only then can an approach to international monetary coordination be devised. The IMF, in its role as the guardian of the international monetary system, could foster this understanding through its analytical work and then initiate discussions on possible forms of international coordination.

Central banks of the advanced economies have already set up standing mutual swap facilities. Similar arrangements could be explored by the reserve-currency central banks with other significant EMEs through the G20 process, with the IMF’s assistance. Risk-mitigation measures would have to be found to protect the reserve-currency central banks from potential losses that could arise from extending such swap facilities to include currencies that are not freely convertible. EME central banks already have large holdings of reserve-currency sovereign debt securities: up to an extent, ways could be found to use such securities as collateral for risk mitigation.

There is also a proliferating set of mutual swap arrangements between various EME central banks and with some reserve-currency central banks. Regional financing arrangements are also being developed to manage the consequences of volatile capital flows. This points to the need for greater international monetary coordination with the IMF in a synchronising role, rather than the alternative of increasing financial fragmentation on a global scale.

Increasing communication among monetary authorities, and the transparent availability of such liquidity facilities, could do much to actually curb volatility in global financial markets and hence in capital flows to EMEs, thus obviating the need for them to take defensive policy action. Although the comfort of the availability of such swap facilities from the reserve currency central banks runs the risk of encouraging an even greater volume of capital flows to EMEs in the boom period, the existence of such swap facilities is overall expected to be positive for the global economy.

Rakesh Mohan is the Executive Director and Muneesh Kapur the Adviser to Executive Director at the International Monetary Fund, Washington DC. The views expressed in the paper are those of the authors and not necessarily those of the institutions to which they belong.

This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The G20 summit at five’.

Categories: Forum

Is bigger better for ASEAN in a mega-regional world?

East Asia Forum - Tue, 09/09/2014 - 17:15

Author: Razeen Sally, NUS

Big-block trade agreements or ‘mega-regionals’, revolving around one or more major powers, are the latest trend in trade policy negotiations. ASEAN is involved in two: the American-led Trans-Pacific Partnership (TPP) and the Chinese-led Regional Comprehensive Economic Partnership (RCEP). But are mega-regionals good for trade and economic growth? Will they spur regional and global economic integration? And where does ASEAN stand?

As of 2013, there were 261 FTAs concluded in Asia, over 100 of which are already in force. Asia’s three major powers, China, Japan and India, are heavily involved as are ASEAN countries Singapore, Malaysia and Thailand. ASEAN also has its own ASEAN Free Trade Area (AFTA), which will be upgraded into the ASEAN Economic Community (AEC) in 2015. And ASEAN has collective FTAs with China, Japan, South Korea, India, and Australia–New Zealand.

The strength of FTAs varies enormously. US FTAs in Asia are by far the strongest. They have the widest sectoral coverage and go deepest with disciplines to ensure market access. But they contain exemptions for politically sensitive sectors and are riddled with complex and discriminatory rules-of-origin (ROO) requirements. EU FTAs in Asia are also relatively strong. But intra-Asian FTAs are generally ‘trade-light’. The better ones remove tariffs on most goods, but they are weak on disciplining protectionist regulatory barriers in goods, services, investment and public procurement. That is true across the board of Chinese, Japanese and Indian FTAs, as well as the FTAs of ASEAN countries.

Overall, the new wave of FTAs has not given a big boost to trade and foreign investment. But nor has it impeded trade growth. Effects have been broadly neutral, or at best marginally positive.

Now attention has shifted to mega-regionals. There are three being negotiated: the TPP, RCEP and the EU-US Transatlantic Trade and Investment Partnership (TTIP). The TPP’s membership is 12 to date (US, Mexico, Canada, Chile, Peru, Australia, New Zealand, Japan, Singapore, Brunei, Malaysia and Vietnam). It started earlier than the others and is the closest to completion. RCEP’s members are the ASEAN 10 countries plus China, Japan, South Korea, India, Australia and New Zealand. Taken together, these three mega-regionals account for the bulk of world trade and GDP.

Mega-regionals potentially amplify the gains from trade liberalisation. If done cleanly and comprehensively, they would iron out distortions caused by multiple and overlapping FTAs among members (such as differing ROOs). With a bigger integrated economic space, they can reap economies of scale and spur technological innovation. This is particularly important for global supply chains. Regional production networks to serve global markets are the biggest drivers of productivity, employment and growth in international trade. They have a big stake in integrated regional and cross-regional markets. Still, mega-regionals are not ’multilateral’: they discriminate against non-members. That is a big potential source of disruption to global supply chains.

The TTIP and the TPP are the most ambitious mega-regionals. They cover markets for all goods, services, investment and government procurement, and go deep into regulatory disciplines — including on intellectual property, food safety and technical standards — and customs procedures. In the TPP, ‘twenty-first century’ innovations include rules to facilitate supply chains and e-commerce.

But there are major barriers that stand in the way of success.

Protectionist lobbies are big obstacles in several countries, including parts of agriculture and autos in the USA, agriculture in Japan, government procurement in Malaysia, and state-owned enterprises in Vietnam. The US insists on intellectual-property, public-health, labour and environmental standards, and ROO requirements that may impede market access for developing countries. And the Obama administration lacks Trade Promotion Authority from Congress, without which the TPP is unlikely to be concluded and ratified. The TTIP has also been slowed down by obstacles on both sides of the Atlantic.

RCEP looks the least ambitious. If it follows the pattern of intra-Asian FTAs, it will remove tariffs on about 90 per cent of goods over a fairly long timeframe. But it will have weak disciplines on non-tariff regulatory barriers that are the biggest obstacles to trade in the region. It might end up agglomerating the ‘noodle-bowl’ of FTAs among members rather than ironing out distortions among them. In such a scenario, RCEP will create little new trade and investment, and cause extra complications for global supply chains. But negotiations still have some way to go.

Much depends on US and Chinese leadership. President Obama’s leadership is needed to conclude a ‘high-quality, twenty-first century’ TPP — and open the door to eventual Chinese membership. But Obama has conspicuously failed to lead on international trade. Similarly, the Chinese leadership has been defensive on trade policy for almost a decade. But there are signs that China is becoming interested again in regional and global trade liberalisation. It will take Chinese leadership to inject more ambition into RCEP.

All ASEAN countries are in RCEP and four are in the TPP. What should they do on mega-regionals? First, they should push for ambitious agreements that are wide (with maximum sectoral coverage) and deep (with strong disciplines on regulatory barriers), with relatively simple ROOs and open accession clauses for non-members. Only this type of mega-regional is likely to create significant trade and investment, and facilitate the expansion of global supply chains. Second, they should back this up with intra-ASEAN measures, such as accelerating progress on the AEC and strengthening provisions in existing FTAs.

But it must be recognised that mega-regionals, and indeed other FTAs, are not a universal remedy. Political realities will inevitably dilute their ambition and quality. Given their gaps and distortions, they are unlikely to deliver the huge gains that many pundits predict. This applies to the TPP, RCEP and the AEC. The key policy implication that follows is that ASEAN countries should go as fast, wide and deep as possible with unilateral liberalisation. They should also ‘multilateralise’ preferences in existing FTAs as far as possible, that is, to extend them to non-members on a non-discriminatory basis. This is how ASEAN countries have liberalised and integrated into global supply chains in the past. That is unlikely to change in the future.

Razeen Sally is Associate Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.

A version of this article first appeared here in The Strait Times.

Categories: Forum

Can Nishikawa resolve Japan’s TPP agricultural impasse?

East Asia Forum - Tue, 09/09/2014 - 05:00

Author: Aurelia George Mulgan, UNSW Canberra

Japanese Prime Minister Shinzo Abe’s appointment of Koya Nishikawa as the new Minister of Agriculture, Forestry and Fisheries (MAFF) is a big plus for the Trans-Pacific Partnership (TPP). Nishikawa is an executive of the so-called ‘agricultural tribe’ (norin zoku) in the ruling Liberal Democratic Party (LDP). While this suggests to some that he will hold out to the last on the issue of opening Japan’s agricultural markets, Nishikawa may not act as expected.

Nishikawa’s appointment as MAFF Minister is a sign that the prime minister is serious about finding a way of resolving the TPP impasse. What Abe has done is essentially repeat what he did just after the LDP returned to power in December 2012. On 1 January 2013, he discussed how to prepare the party for participating in the TPP negotiations. The first person he telephoned was Nishikawa, whom he then appointed as chairman of the LDP’s TPP Affairs Committee. Abe’s strategy was to fight fire with fire, explaining his move as ‘fighting tribe Diet members (zoku) with a tribe Diet member (zoku)’.

Abe spent much of his period in the political wilderness (between his first and second stints as prime minister) devoting his time to researching the personnel affairs of former prime ministers Eisaku Sato and Yasuhiro Nakasone who both maintained long-term administrations based on skilful personnel management. As a result of his research he found the ‘solution’ for dealing with the TPP. Abe decided to use an anti-TPP figure to suppress other anti-TPP members.

Nishikawa is well qualified for the task. As well as being a long-standing member of the LDP’s norin zoku he has previously represented the LDP in WTO agricultural trade negotiations. More importantly, he made a good impression on Abe when he was Senior Vice-Minister of the Cabinet Office in charge of postal privatisation under then prime minister Junichiro Koizumi. In that role, he used his considerable powers of persuasion to bring LDP Diet members who were opposed to privatisation on side. Then in his role as chairman of the LDP’s TPP Affairs Committee, he delivered for Abe by effectively coordinating the consensus in the party that enabled Abe to announce the decision on joining the TPP talks.

Nishikawa remained responsible for intraparty coordination on the TPP issue, which meant deciding the LDP’s TPP policy. For example, the TPP Affairs Committee determined which agricultural items should be exempt from tariff elimination in the TPP negotiations — the so-called ‘sacred five’: rice, wheat, beef and pork, dairy products and sugar. Its March 2013 resolution stated that Japan should pull out of the TPP negotiations unless it could retain the tariffs on these items.

As Abe’s trusted appointee, Nishikawa continued to act as the primary go-between for Abe on TPP issues and to report directly back to him as party president — saying ‘the prime minister gave me the role of keeping the party under control’. He gained a reputation for putting a lot of energy into moving the TPP negotiations forward in the interests of the prime minister. He ran foul of the anti-TPP group in the party by showing flexibility on the issue of abolishing tariffs on the five ‘sensitive products’ in Bali in October 2013. He told reporters that the LDP was planning to study the possibility of eliminating tariffs on some of the sensitive items.

Nishikawa also caused waves in the talks inside the LDP on reform of the Japan Agricultural Cooperatives (JA), going all out to support the LDP’s reform proposal and issuing a strong verbal rebuke to Diet member Yoshio Kimura who accused him (and others) of trying to use JA reforms to make up for the fact that they hadn’t done well on the TPP. He shouted at Kimura, ‘we are doing well [on the TPP]. What are you talking about, you juvenile’. When Nishikawa bumped into Akira Banzai, head of the Central Union of Agricultural Cooperatives (JA-Zenchu, JA’s independent administrative body) in May 2014, he said to him, ‘the JA is always complaining; can’t you show some appreciation?’.

In March 2013, the Nikkei reported Nishikawa as questioning whether the agricultural cooperatives had been a positive influence in the agricultural sector, and asserting that the government should implement drastic agricultural reform measures taking advantage of Japan’s participation in the TPP.

Nishikawa firmly believes that Japanese agriculture needs reform and that trade liberalisation is inevitable. In that light, he has been on a mission to find a middle way between the agricultural protectionist diehards on the one hand and those who support Japan’s entry into the TPP on the other. He wants to conclude the US–Japan TPP talks because he backs the TPP as being in Japan’s national interest.

Earlier this year, he reportedly said that ‘Japan will only accept numbers for tariff rates on sensitive agricultural products that will allow us to keep our promises with the people. Even if the United States adopts a hardline position, we will do just the same’. These remarks show that Nishikawa remains sound on political fundamentals but is flexible on details in order to move negotiations forward. He presents a tough face to both sides and is not afraid of confrontation. At this point, he is eager to conclude the TPP talks even if it means accepting tariff cuts on some of the five sacred products.

Reassured by Abe that his cabinet will protect Japan’s agriculture and farm villages in the TPP negotiations, Nishikawa has now been rewarded by Abe for taking a positive stance towards reform. He certainly disagrees with the new appointee to the party’s highest policy office, Tomomi Inada. She was once quoted as saying: ‘The destination of the TPP bus is the graveyard of Japanese civilisation’.

Aurelia George Mulgan is Professor at the University of New South Wales, Canberra.

Categories: Forum

Latin America lures Asia’s big powers

East Asia Forum - Mon, 09/08/2014 - 17:00

Author: Juan J. Palacios, University of Guadalajara

Considered for most of the twentieth century as the United States’ backyard, Latin America is today a place where other major powers seek to exercise a growing influence and find a steady supply of energy and natural resources as well as markets and investment outlets.

In the span of just three weeks in July, the leaders of Russia, China and Japan led well publicised tours in the region. Vladimir Putin arrived in Cuba on 11 July and from there visited Nicaragua, Argentina and Brazil. Xi Jinping landed in Brazil on 14 July and then toured Argentina, Venezuela and Cuba. Shinzo Abe started in Mexico on 25 July, continuing to Trinidad and Tobago, Colombia, Chile and Brazil.

Putin’s trip to Latin America was a timely opportunity and the summit meeting of the BRICS grouping to be held in Brazil was a handy excuse. Beyond his official goals, Putin sought to widen Russia’s influence in the region and, especially, to rebuild the partnership with Cuba given his urgent need for allies in the west, especially one neighbouring the United States.

The day before his departure for Havana, Russia’s Federation Council (the upper house of the national legislature) ratified an agreement to write off 90 per cent of Cuba’s US$35.2 billion debt to the Soviet Union. This move, and his encounter with Fidel Castro, revealed Putin’s intention to revive an old and, today highly, useful friendship broken by the collapse of the former superpower. On 15 July, Russian newspaper Kommersant reported that government officials had announced that Putin had closed a deal with Cuba to reopen the Lourdes signals intelligence facility — a listening post located just a couple of hundred kilometres away from Florida — which was used by the Soviets to spy on the United States during the Cold War. Putin denied this claim a day later in his speech at the BRICS summit but the news was already out.

In any case, the perception that he may be harbouring the idea of rebuilding the Soviet empire was reinforced with those moves. After all, in 2005 he declared that the collapse of the Soviet Union was the greatest geopolitical disaster of the twentieth century and last March orchestrated the annexation of Crimea.

Regardless of Putin’s ambitions, Latin America benefited from his tour: he waived the Cuban debt; signed several agreements in Argentina to provide technical and financial support for the construction of two power dams and parts for a nuclear power plant; and pledged to increase Russia’s food imports from Ecuador, Chile, Brazil and Argentina. In addition, he expressed a keen interest in Latin America’s vast reserves of oil, bauxite, water, and food.

China’s President Xi Jinping, in turn, sought to secure a steady supply of oil and raw materials and tap investment niches to ease the pressures stemming from overinvestment at home. To do so he brought a big bag of fresh capital, a tactic China has followed for the last decade. From 2005 to 2013, the China Development Bank loaned more than US$98 billion dollars to over a dozen countries that were finding it hard to get credits through the main international institutions. Nearly 90 per cent of those loans were channelled to Venezuela, Argentina, Brazil and Ecuador to be repaid through long-term oil sale deals. During his trip, Xi disbursed nearly US$68 billion more for multiple projects in the countries he visited. He also agreed to provide Cuba with soft loans for trade deals and roll over its debt.

But Xi harvested a valuable crop too. He got agreement that the BRICS development bank will have its headquarters in Shanghai. He also secured a permanent presence for China in the Community of Latin American and Caribbean States (CELAC) with the creation of a China-CELAC forum, which held its first meeting during Xi’s visit to Brazil.

Just three days after Xi left Latin America, Japanese Prime Minister Shinzo Abe arrived in Mexico. Although Japanese government officials argued that the close timing was a coincidence dictated by the Japanese parliamentary calendar, the general perception was that ‘where Xi leads, Abe follows’.

Abe signed 14 economic and technical cooperation agreements with Mexican President Enrique Peña Nieto and offered to collaborate with him on the Trans-Pacific Partnership (TPP). Abe also pledged to bolster the Pacific Alliance (a trade bloc between Chile, Colombia, Mexico and Peru) and increase Japan’s presence within it. He repeated this pledge to Presidents Juan Manuel Santos and Michelle Bachelet in his visits to Colombia and Chile respectively. In addition, he offered to accelerate negotiations toward signing an FTA with Colombia so that Japan can have FTAs with all four members of the Pacific Alliance.

In Trinidad and Tobago, Abe attended the summit meeting of the Caribbean Community and Common Market (CARICOM) and the first meeting of the newly established Japan-CARICOM summit. In these meetings he ensured a permanent presence of Japan in CARICOM and won the support of its members for Japan to secure a non-permanent seat on the UN Security Council, one of Abe’s official objectives in Latin America.

Japan is catching up with China in Latin America. On 28 July, Peter Drysdale observed that Abe is seeking to realise Japan’s post-war vision of a ‘region-wide economic dynamism, with expanding frontiers’. It seems that these frontiers can expand across the Pacific into Latin America.

More generally, the tours of Abe and Xi further increased the entanglement of the Asia Pacific’s spaghetti bowl of FTAs and regional and sub-regional arrangements. Japan now has a permanent presence in CARICOM and potentially in the Pacific Alliance, as China does in CELAC. The question now is how these movements will feed into the current momentum surrounding mega-regional trade deals in the Asia Pacific, and whether they will improve China’s chances of getting into the TPP.

Juan J. Palacios is a Professor at the Department of Political Studies, University of Guadalajara, and a member of the PAFTAD International Steering Committee.

Categories: Forum

India draws Japan closer as Modi embraces Abe

East Asia Forum - Mon, 09/08/2014 - 05:00

Author: Purnendra Jain, University of Adelaide

The unprecedented warm hug between India’s new prime minister Narendra Modi and Japanese prime minister Shinzo Abe when they met in Japan’s ancient capital Kyoto sent strong diplomatic signals across the region and beyond. This was Modi’s first stop in Japan on a five-day official visit beginning 30 August. In a rather unusual move, Abe went to meet Modi in Kyoto and together they visited a temple before their summit meeting in Tokyo.

The mutual warmth expressed at their meeting in Kyoto confirmed strong personal chemistry between the two national leaders, who have both publicly congratulated each on twitter on their electoral successes. But personal chemistry is not the only reason for Modi to make Japan his first overseas destination beyond the subcontinent.

More than most of his predecessors, Modi is familiar with Japan and recognises its value for India’s economic development. Although never before a national parliamentarian or minister, Modi is not an unknown political figure in Japan. As chief minister of Gujarat state he visited Japan twice — while banned from entering the United States — and established good rapport with senior Japanese political figures, including Shinzo Abe who was then in opposition. During this time Modi travelled not only to Tokyo but also to Nagoya, Osaka and Kobe, holding meetings with high-profile business leaders and successfully attracting huge Japanese investment in Gujarat.

Abe and other Japanese leaders recognise that unlike many of his predecessors in the last three decades, Modi stands on solid political ground. Delivering a landslide electoral victory to his Bharatiya Janata Party in May this year, Modi secured his place as India’s prime minister for the next five years. Modi’s unprecedented national political victory is based on his electoral promise to the people of India that his administration will make a real difference to India economically, political and socially. To this end Modi finds Japan a key economic and strategic partner.

Modi went to Japan with three goals in mind: to seek closer economic partnership with Japan through greater Japanese investment in India’s infrastructure projects including bullet trains; to secure cooperation on defence technology; and to finalise a civil nuclear agreement with Japan. These are not new items on the India–Japan cooperation agenda, but — being a pro-business Indian leader at the top supported by a solid mandate for India’s economic development — Modi was confident of breaking new ground in Japan, especially with Abe. The two national leaders hold similar viewpoints on economic growth in their respective countries and are concerned by the changing geo-political environment in the region.

There were no significant breakthroughs in the nuclear and defence cooperation fields. Yet Modi secured billions of dollars in investment commitments for major infrastructure projects, although not specifically for bullet trains. Both leaders confirmed through a ‘Tokyo Declaration’ that the two nations will work towards further progress in areas of mutual interest such as nuclear power technology, search and rescue planes (the US-2 amphibious aircraft) and bullet trains.

Modi’s achievement clearly lies in assuring his interlocutors in Japan that under his leadership India is ready to get rid of its ‘red tape’ and instead roll out ‘red carpet’ to Japanese investors. He has promised to set up a special management team in the Prime Minister’s Office to facilitate Japanese investment in India. Few will challenge the worth of Modi’s ideas since he implemented many of them as chief minister of Gujarat. But many observers doubt that he can emulate his Gujarat experience on a national level due to the federal structure where support from states is essential to implement policies nationally.

Rhetorically the two leaders reminded each other of their mutual goodwill and future potential for cooperation. Modi sees ‘only goodwill and mutual admiration’ between India and Japan, while Abe believes India holds for Japan ‘more potential than any other relations’. The pair has added ‘special’ to their existing lexicon of ‘strategic and global partnership’ to confirm a ‘special strategic and global partnership’, symbolising an upgrade in this bilateral relationship.

While both leaders are concerned about China’s rise and its assertiveness, neither leader talked directly about China or a ‘third party’ in their meetings. Prime Minister Modi in one of his speeches stated his preference for economic development (vikasvad) over expansionism (vistarvad), which is code for China’s assertiveness and expansionist actions in the South and East China Seas and its claim on Indian territories.

Although no big announcements resulted from Modi’s visit to Japan, the warmth of his reception signals the trip was a huge symbolic success. Wherever he visited, whether a temple or a primary school for community engagement, business meetings, or a summit meeting, Modi clearly wanted to engage with the Japanese people and their government. Interlocutors were impressed by his sincerity and genuine interest. This is surely no small achievement for a freshly minted Indian prime minister.

Purnendra Jain is Professor in Asian Studies at the University of Adelaide.

Categories: Forum
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